Corporate Governance Victory for Pomerantz

In a case of first impression in Delaware, Chancellor Bouchard of the Delaware Court of Chancery ruled today that a fee-shifting bylaw adopted after Plaintiff was cashed out in a high threshold reverse stock split was inapplicable as to Plaintiff and the class. Noting the dearth of precedent on the issue, Chancellor Bouchard accepted Plaintiff’s novel arguments that a bylaw adopted after a stockholder’s interest is extinguished is contrary to contract law and the Delaware General Corporation Law.

Chancellor Bouchard explained that the Bylaw does not apply for two related reasons (i) the Board adopted the Bylaw after Plaintiff’s interest in the Company was eliminated by the Reverse Stock Split; and (ii) Delaware law does not authorize a bylaw that regulates the rights or powers of former stockholders who were no longer stockholders when the bylaw was adopted.

This corporate governance decision may have broad-reaching implications beyond our discrete case. Chancellor Bouchard found that “the Bylaw does not apply here because the Bylaw was adopted after Plaintiff’s equity interest in the Company was eliminated”. Therefore, ANY bylaw adopted after a stockholder’s interest was extinguished would be inapplicable as to that stockholder.